Explanation

This specific risk was not identified in the FDD package. Item 20 tables show no franchisee terminations, non-renewals, or other cessations of business for the past three years. However, a high turnover rate in any franchise system can be a major red flag, often signaling issues with profitability, franchisor support, or the overall business model. It is a critical area for due diligence.

Potential Mitigations

• It is still prudent to speak with current and former franchisees to gauge their satisfaction and the reasons for any departures you may learn about.
• An analysis of the Item 20 data with your accountant can help you understand franchisee churn and system stability.
• Your attorney can help you formulate questions for the franchisor regarding franchisee success and satisfaction rates.

Explanation

This risk was not identified in the provided FDD. The data in Item 20 indicates that the system has been static at four outlets for the last three years, with only one projected new opening. Rapid growth can strain a franchisor's ability to provide adequate support, so its absence here may be a positive sign, although the lack of growth presents its own challenges.

Potential Mitigations

• Engaging a business advisor can help you evaluate the pros and cons of joining a slow-growing system versus a rapidly expanding one.
• A discussion with your accountant about the franchisor's financial capacity to support any future growth is a wise step.
• Consulting with your attorney can help you understand any development obligations you might have.

Explanation

This risk was not identified in the FDD. The franchise operates in the Indian vegetarian restaurant sector, a well-established and enduring segment of the food industry rather than a temporary trend. A fad-based business carries the risk of declining consumer interest, which could jeopardize your long-term investment after the trend fades.

Potential Mitigations

• A business advisor can help you assess the long-term market trends for any franchise concept you are considering.
• Researching the stability and history of the specific industry sector is a wise step for any potential business owner.
• It is prudent to have your accountant model financial performance under various market conditions.

Explanation

This risk was not identified in the FDD. Item 2 indicates that the key executives have been involved with the Neehee's concept since 2006 and have been franchising this and another concept for several years. Inexperienced management can be a significant risk, as it may lead to weak support systems, poor strategic decisions, and inadequate franchisee assistance.

Potential Mitigations

• It is still advisable to interview current franchisees about the quality and competence of the management team and the support they provide.
• A business advisor can help you independently vet the background and track record of the franchisor's leadership team.
• Your attorney can help you understand the contractual obligations the franchisor has for providing support and training.

Explanation

This risk was not identified in the FDD. Item 1 indicates the franchise has no parent company and there is no mention of private equity ownership. When a franchisor is owned by a private equity firm, there can be a risk that decisions are focused on short-term profits and a quick exit, potentially at the expense of long-term franchisee health and support.

Potential Mitigations

• When evaluating any franchise, your attorney can help you understand the complete ownership structure as disclosed in Item 1.
• A business advisor can assist in researching the ownership history and reputation of any parent company or private equity firm involved.
• It is always a good idea to ask current franchisees about any changes in operations or philosophy due to ownership.

Explanation

This risk is not present, as Item 1 clearly states there is no parent company. In some franchises, a thinly capitalized franchisor may be owned by a larger parent company. If that parent company's financial information is not disclosed, it can hide financial instability, which could affect the franchisor's ability to support its franchisees.

Potential Mitigations

• For any franchise, your attorney should review Item 1 and Item 21 to ensure all required financial disclosures, including for parent companies that guarantee performance, are present.
• An accountant's review of the provided financial statements is critical to assess the standalone viability of the franchisor entity.
• Engage a business advisor to research the corporate structure and any affiliate relationships.

Explanation

This risk was not identified, as Item 1 of the FDD explicitly states that the franchisor has no predecessors. When a franchisor has a predecessor, it is important to investigate that entity's history, including its litigation, bankruptcy, and franchisee turnover records, as past problems could indicate ongoing systemic issues that may have been inherited by the current franchisor.

Potential Mitigations

• Your attorney should always verify the predecessor disclosures in Item 1 of any FDD.
• If a predecessor exists, a business advisor can help you research its history and reputation in the industry.
• When predecessors are disclosed, it is crucial to ask long-tenured franchisees about their experiences under the previous ownership.

Explanation

This risk was not identified in the FDD. Item 3 discloses that there is no litigation that requires disclosure. A pattern of litigation, particularly franchisee-initiated lawsuits alleging fraud or misrepresentation, can be a significant warning sign of systemic problems within a franchise, suggesting potential issues with the franchisor's sales practices, support obligations, or overall business relationship.

Potential Mitigations

• Always have your attorney thoroughly review the litigation disclosures in Item 3 of any FDD.
• A business advisor can help you conduct independent online searches for news articles or other reports of franchisee disputes.
• It is wise to ask current franchisees about the franchisor's general relationship with its franchisees and any history of disputes.